Q1 2022 Travelers Companies Inc Earnings Call

Yeah.

Okay.

Good morning, ladies and gentlemen, welcome to their first quarter results teleconference for travelers. We ask that you hold all questions until the completion of formal remarks at which time you will be given instructions for the question and answer session. As a reminder, this conference is being recorded on April 19th 2022.

At this time I would like to turn the conference over to MS. Abbe Goldstein Senior Vice President of Investor Relations Ms. Goldstein you may begin.

Thank you good morning, and welcome to travelers discussion of our first quarter 2022 result, we released our press release financial supplement and webcast presentation earlier. This morning. All of these materials can be found on our website at travelers dot com under the investors section.

Speaking today will be Alan Schnitzer, Chairman and CEO , Dan Fried Chief Financial Officer, and our three segment Presidents, Greg cause Lawsky business insurance, Jeff Klink, our bond and specialty insurance and Michael Klein of personal insurance they will discuss.

First the financial results of our business and the current market environment They will.

Refer to the webcast presentation as they go through prepared remarks, and then we will take questions.

Before I turn the call over I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation. Today includes forward looking statements. The company cautions investors that any forward looking statements involve risks and uncertainty and it's not a guarantee of future performance actual results may differ materially.

And those expressed or implied in the forward looking statements due to a variety of factors. These factors are described under forward looking statements in our earnings press release and in our.

Our most recent 10-Q and 10-K filed with the SEC, we do not undertake any obligation to update forward looking statements.

Also in our remarks or responses to questions. We made mention of some non-GAAP financial measures. Reconciliations are included in our earnings press release financial supplement and other materials available in the investors section on our website.

One more thing before I turn the call over to Alan I'd like to direct your attention to our updated overview of travelers presentation that we posted on the investors section of our website, there's a lot of terrific background and other content in the document I would encourage you to take a look at it whether you are familiar with travelers or new to our story and with that it's my pleasure to turn.

Turn the call over to Alan Schnitzer.

Thank you Abby good morning, everyone and thank you for joining us today.

We're very pleased to report actual results this morning.

Before we dive into the quarter I want to acknowledge the geopolitical crisis humanitarian nightmare unfolding in Ukraine.

Thoughts and prayers are with those under attack.

<unk> is seeking licenses basic necessities.

Loved ones of those who lost their lives.

Turning now to our results we're off to a terrific start to the year.

It's an excellent bottom line results growth in all three segments.

Strong and improved profitability in our commercial business segments.

Progress addressing the environmental headwinds facing the personal insurance industry.

Another quarter of progress on a number of important strategic initiatives.

Core income for the quarter was $1 billion or $4.22 per diluted share.

<unk> core return on equity of 15, 5%.

These results were driven by net earned premiums of $8 billion up 9% over the prior year quarter.

Excellent combined ratio of 91, 3%.

We're particularly pleased with the continued strong underlying results in our commercial businesses.

Looking at the two commercial segments together.

Combined <unk> BSI.

The combined ratio was 92% for the quarter and.

An improvement of nearly two points from the prior year quarter.

Underlying results in personal insurance, we're impacted by auto loss frequency returning to more normal levels.

Miles driven has increased as well as elevated severity in auto and property.

Against this challenging backdrop of environmental headwinds <unk> results for the quarter were nonetheless solid now.

At 95, 3% all in combined ratio.

Turning to investments our high quality investment portfolio generated net investment income of $539 million after tax for the quarter.

Reflecting reliable results for our fixed income portfolio and strong returns from our non fixed income portfolio.

As you'll hear from Dan shortly the recent rise in interest rates positively impacts our outlook for fixed income NII.

Our excellent operating results together with our solid balance sheet enabled us to grow adjusted book value per share by 11% over the past year.

And that's after making important investments in our business and returning excess capital to shareholders.

During the quarter, we returned $773 million of excess capital towards shareholders, including nearly $560 million of share repurchases.

In light of our strong financial position and confidence in the outlook for our business I am pleased to share that our board of directors declared a 6% increase in our quarterly cash dividend to <unk> 93 per share.

18 consecutive years of dividend increases with a compound annual growth rate, 9% over that period.

Turning to the topline thanks to excellent execution by our colleagues in the field and the strong franchise value we offer to our customers and distribution partners. We grew net written premiums by 11% this quarter to a record $8 4 billion.

Each of our three segments made strong contributions.

In business insurance renewal premium change was nine 1% remaining near all time highs.

At the same time retention of 87% wasn't all time high.

We have a very high quality book of business and keeping it as a priority.

Also as we've shared previously.

Retentions are a sign of a rational and stable pricing market.

Underneath the headline numbers execution at a segmented level was excellent.

Higher retention of our best business and more rate in those segments that need it.

New business levels were also strong up about 17% over the prior year quarter.

Leighton beyond net written premiums grew 9%.

In bond <unk> specialty insurance net written premiums increased by 22%.

Driven by strong production in both management liability and surety.

In management liability renewal premium change was up 12%, while retention remained high new business was up 12%.

In surety production was terrific with net written premiums up 29%.

Notwithstanding some severity pressure from the inflationary environment. We're pleased to see continued written margin expansion in both of our commercial businesses, which of course will earn in over time.

In personal insurance net written premiums increased by 12%.

Renewal premium change.

Premium change increased in both auto and homeowners.

Execute to improve margins.

As we expected retention and new business growth moderated a little bit in response.

You'll hear more shortly from Greg, Jeff and Michael about our segment results.

Notwithstanding our terrific results in an economy that in many respects feels pretty good at the moment.

There was a fair amount to pay attention to in terms of the macroeconomic outlook for the world in general in our industry in particular.

There's a wide range of views on the outlook for economic growth in headline inflation is at a 40 year high.

Geopolitical risk is in a decade's time, where ranges in eastern Europe tensions rise elsewhere in the world Nationalizes reversing a trend of globalization.

Between the plaintiff's bar regulatory uncertainty and weather severity loss costs are as challenging as ever to predict.

The global pandemic reminds us of the risk of unknown unknown.

The one thing we know for sure is that the pace of technological change is accelerating.

Travelers is built for this environment.

For starters, our culture of unmatched underwriting and investment discipline positions us for nearly any environment.

That's been the foundation of our success through the 2008 financial crisis.

Severe natural and man made catastrophes like 911 and Hurricane Katrina.

A major inflection in liability loss cost trends.

The pandemic and now that we're in Ukraine.

Well, the twist and turns foreseeable and otherwise we have consistently delivered industry, leading returns and industry low volatility.

We didn't exactly predict any of those events.

Managing our business for long term success by carefully balancing risk and reward on both sides of the balance sheet.

Mission is to successfully manage through all of them.

In terms of the economic outlook, if the economy continues to grow we will benefit from higher insured exposures.

As you've seen in our results over the past few quarters.

If we head into a recession, we're very well positioned having made significant progress in improving productivity and efficiency in recent years.

In terms of higher inflation, there are several things to keep in mind.

First with respect to our fixed income portfolio, we would expect to benefit from higher net investment income.

As higher inflation is typically accompanied by higher interest rates.

Second on the underwriting side, we have a favorable business mix.

Our domestic commercial GL and workers comp lines accounted for about a quarter of our premiums.

Both have an audit mechanism for retroactive premium adjustment.

And as we discussed.

Exposures, particularly from wages and sales contribute to improve margins.

The short tail personal insurance lines in commercial property.

For almost half of our premiums.

In short tail lines, we can identify and price for the impact of inflation reasonably quickly.

And the reserves on the balance sheet are significantly less exposed to changes in loss inflation.

Finally, we take into account the inflationary environment and the related uncertainties. When we established our loss picks and center balance sheet reserves.

When assessing inflation were generally cautious, especially during periods of elevated uncertainty.

We're also well positioned in terms of geopolitical risk.

We're primarily U S based with more than 95% of our premiums coming from North America.

And we have a focused international footprint with strong partnerships that provide us with the ability to place our customers business all over the world.

Consequently, our business is to a significant degree insulated from the heightened geopolitical risk environment.

With our leading franchise in the U S. We have the pole position in the largest most advanced and most stable economy in the world.

Given the size of the U S economy, even a modest rate of growth generate substantial growth in dollar terms.

And therefore substantial growth opportunities for travelers.

With our footprint, we have opportunities to continue growing two geographies products us as a business and distribution partners that we've known and understood for decades.

And given our concentration is a primary insurer and admitted markets there are meaningful barriers to entry.

Importantly, within the largest insurance market in the world our business also benefits from significant diversification.

We offer nine major lines of insurance to personal and commercial customers.

Our portfolio is balanced across these lines of business and.

And further diversified across regions, our distribution partner and by class and customer size.

In this business. The one constant is that loss costs are going to change what's important is having the ability to quickly identify and react to the changes and we do.

We have an advantage in terms of the quantity and quality of our data and the sophistication of our analytics.

We spent decades fostering a culture that knows.

How to balance the art and science of underwriting.

We have a strong orientation towards risk adjusted returns and we have an incredibly tight feedback loop among our underwriting claims and actuarial disciplines.

All of that contributed to our early recognition of social inflation.

<unk> us to respond early in terms of underwriting and claims handling strategies.

We have been similarly forward leaning and developing underwriting and claim strategies to address where the severity.

As we've discussed a few times over the last five years, we've outperformed our market share in terms of cat losses.

Another thing that is crystal clear is the rapid pace of change in the world.

While the current conditions or requirements to be laser focused on the here and now and we are the.

The dramatic pace of change.

Together with our scale industry leadership deep domain expertise and talent advantage presents us with the opportunity to lead and transforming the way business is done.

Yeah.

We have a well defined innovation strategy and the demonstrated success over the past half dozen years, or so and innovating with desired outcomes.

<unk> industry, leading returns and industry low volatility.

In short, we feel very well positioned for continued success no matter what environment comes our way.

In the meantime, we're innovating on top of the foundation of excellence to transform our business to competitive advantages that are relevant differentiating and difficult to replicate.

With that I'm pleased to turn the call over to Dan.

Thank you Alan.

Core income for the first quarter was $1 $4 billion.

Up from $699 million in the prior year quarter and core return on equity was 15, 5%.

The increase in core income resulted primarily from a lower level of catastrophe losses.

Partially offset by a lower level of favorable prior year reserve development and strong, but lower returns in our non fixed income portfolio.

Underlying underwriting income was strong in both periods.

Our first quarter results include $160 million of pre tax cat losses, much lower than last year's record high first quarter was $835 million pre tax.

Our after tax underlying underwriting gain of $580 million was consistent with the prior year quarter.

Selecting higher levels of earned premium and an underlying combined ratio of 91, 2%.

Improvements in the underlying combined ratio in both business insurance and bond and specialty were more than offset by an increase in the underlying combined ratio in personal insurance Greg.

Greg, Jeff and Michael will provide more detail on each segment's results in a few minutes.

The first quarter expense ratio improved in all three segments.

<unk> expense ratio of 29% nearly a full point below last year's 29, 9%.

We continue to make significant investments in strategic initiatives, while the combination of our strategic focus on expense discipline and strong topline growth delivered a lower expense ratio.

As we indicated in our fourth quarter earnings call there will inevitably be some variation in any given quarter.

We're still planning for a full year expense ratio for 2022 of around 29, 5%.

And we're on a path towards a full year expense ratio of around 29% in the next year or two.

Turning to prior year Reserve development, we had total net favorable development of $153 million pre tax in the first quarter.

In business insurance net favorable <unk> of $113 million was driven by better than expected loss experience in workers' comp.

It also includes an environmental charge of $45 million.

In bond and specialty net favorable <unk> of $35 million was driven by better than expected results in the surety book.

Personal insurance experienced $5 million of net favorable.

With modest activity in both auto and home.

After tax net investment income decreased by 9% from the prior year quarter to $539 million.

Returns in our non fixed income portfolio were strong, but as expected were less favorable than we experienced in last year's quarter.

Fixed maturity NII was higher than in the prior year quarter as the benefit of higher invested assets more than offset the impact of lower fixed income yields.

With the recent increase in interest rates, we are raising our outlook for fixed income NII, including earnings from short term securities to.

<unk> $440 million after tax in the second quarter.

To approximately $460 million in the third quarter, and then to $480 million in the fourth quarter.

Remember only about 9% of the portfolio turns over each year. So the higher new money rates will take a while to fully impact run rate NII.

Recall that results for our private equities hedge funds and real estate partnerships are generally reported to us on a one quarter lag.

While not perfectly correlated or non fixed income returns directionally follow the broader equity markets, which were generally down during the first quarter. Accordingly, we expect that to be reflected in our non fixed income results next quarter.

Regarding reinsurance as discussed during our fourth quarter results call, we renewed our underlying property aggregate catastrophe ex ol treaty for 2022, providing aggregate coverage of $225 million part of $500 million of losses above an aggregate retention of $2 billion.

Through March 31.

We've accumulated $175 billion of qualifying losses towards the aggregate retention.

Our effective tax rate for the first quarter benefited from the favorable completion of an income tax audit for 2017, and 2018, which resulted in the release of $47 million of tax accruals related to those years.

Turning to capital management.

Operating cash flows for the quarter of $1 $3 billion were again very strong all our capital ratios were at or better than target levels and we ended the quarter with holding company liquidity of approximately $1 5 billion.

As interest rates increased and spreads widened during the quarter we.

We moved from a net unrealized investment gain of $2 $4 billion. After tax at year end two of net unrealized investment loss of $1 4 billion after tax at March 31.

Remember the changes in unrealized investment gains and losses do not impact how we manage our investment portfolio.

We generally hold fixed income investments to maturity.

Quality of our fixed income portfolio remains very high and changes in unrealized gains and losses have little or no impact on our statutory surplus or regulatory capital requirements.

Adjusted book value per share, which excludes unrealized investment gains and losses was $112 19 at quarter end.

Up 2% from year end and up 11% from a year ago.

We returned $773 million of capital to our shareholders this quarter comprising share repurchases.

$569 million and dividends of $214 million.

And as Alan mentioned earlier, our board authorized a 6% increase in the quarterly dividend to <unk> 93 per share.

Sticking with the topic of capital management.

You are likely aware that standard <unk> poors has proposed changes to its capital adequacy model.

Our final guidance and the actual proposed models from S&P it would be premature to draw a conclusion as to the potential impact.

What I can say is that as always we are most interested in our own view of the appropriate level of capital to ensure our financial resilience.

As we have consistently demonstrated including with our excellent results in 2021 in the first quarter of 2022.

Our disciplined approach to risk selection asset management prudent reserving and thoughtful capital management come together to deliver profitable growth, while ensuring that we have the financial strength to navigate even the most challenging of circumstances.

While we believe it's important to remain very well capitalized and continued growth in the business will require higher levels of capital going forward, we will not maintain a level of capital beyond what we consider to be appropriate simply to obtain a certain rating level.

Finally, as it related to the hostilities in Ukraine.

Don't have any direct exposure to Ukraine, or the Russian Federation in our investment portfolio.

Given the current scope of hostilities or insurance exposures in the impacted areas are not significant.

And with that I'll turn the call over to Greg for a discussion of business insurance.

Business insurance is off to a terrific start in 2020 with an exceptionally strong first quarter segment income of $669 million was well over double the first quarter of 2021, driven by lower catastrophes and higher underlying underwriting income.

The quarter's underlying combined ratio of 91, 8% was almost two points better than the first quarter of 2021.

The loss ratio improved by about a point driven by higher earned pricing despite elevated severity, reflecting the inflationary environment.

The expense ratio also improved by about a point, resulting from the combination of the leverage from higher earned premiums in the benefits of our strategic focus on productivity and efficiency.

Net written premiums increased 9% to an all time quarterly high of $4 5 billion.

Benefiting from historically high renewal premium change and retention as well as an increase in new business.

All lines of business were up over the prior year quarter.

Turning to domestic production for the quarter renewal premium change of nine 1% included renewal rate change of four 4% and an all time high for exposure growth of four 9%, reflecting continued improvement in our customers' outlook for their businesses.

Retention of 87% was also a record high and finally, new business of $544 million was up 17% from the first quarter of last year, driven by our success with large accounts in middle market as well as our continued success with our innovative.

Bob two point old product in select.

We're pleased with these production results and our superior execution in the marketplace.

Given our high quality book as well as several years of meaningful rate increases and improvements in terms and conditions. We're thrilled to have produced record retention levels.

The rate gains we achieved in the quarter reflect deliberate execution given the significant improvements in profitability across the portfolio aimed through the benefit of higher exposures.

Right and workers comp was a little more negative than we've seen over the past year, which is consistent with the strong profitability of the lot.

Having said that overall renewal premium change in the Workers' comp line was well into positive territory as exposure growth was at the highest level we've seen since 2006.

Given the headwinds and uncertainty in the current environment, we will continue to execute our granular pricing careful management of deductibles attachment points limits sub limits and exclusions to achieve profitable growth.

As for the individual businesses in select renewal premium change was a strong 9% while retention of 83% ticked up a point sequentially and was up four points from the prior year quarter.

New business was up 16% from the prior year quarter, driven by the continued success of our <unk>.

<unk> two point old product as I mentioned earlier.

With improved margins in this business, we're pleased with the higher retention levels and continued momentum in new business growth.

In middle market renewal premium change remained strong at eight 8% while retention reached an all time high of 89%.

New business was up 20% from the prior year quarter, driven predominantly by our success with large accounts as I mentioned earlier.

To sum up business insurance had a great start to the year, we continue to improve the profitability of the book, while investing in capabilities to enhance our position as the undeniable choice for the customer and an indispensable partner for our agents and brokers with that I will turn the call over to Jeff.

Thanks, Greg.

The specialty started the year with a terrific quarter on both the top and bottom lines.

Segment income was $217 million up 58% from the prior year quarter, driven by higher underlying underwriting income lower cat losses, and a higher level of net favorable prior year Reserve development.

The underlying combined ratio of 82, 2% improved by two points from the prior year quarter, reflecting the benefit of earned pricing that exceeded loss cost trends.

Also the prior year quarter had about a point or so from some large cyber loss activity.

That didn't recur.

Turning to the topline net written premiums grew an outstanding 22% in the quarter with strong contributions from all our businesses.

In domestic management liability renewal premium change remained in double digits and improved by a little more than a point from the fourth quarter.

Retention remained strong despite the impact of our ongoing strategy to Nonrenewed cyber accounts that do not meet our minimum cyber security protocols, including multifactor authentication.

That change in our underwriting as having a meaningfully favorable impact on cyber claim frequency.

We expect to complete the execution of this strategy across our renewal portfolio by the end of the second quarter.

Notably domestic management liability new business increased 12% from the prior year quarter.

We were also pleased with the strong production this quarter from our domestic surety.

And international businesses.

So both top and bottom line results for bond <unk> specialty were terrific this quarter.

Reflecting both excellent execution across our business and the value of our market, leading products and services to our customers and distribution partners and now I will turn the call over to Michael.

Thanks, Jeff and good morning, everyone.

Personal insurance began 2022 with solid profitability in the context of an ongoing challenging environment.

First quarter segment income was $225 million down $89 million from the prior year quarter as lower underlying underwriting margins and lower favorable prior year reserve development were partially offset by lower catastrophes.

The total combined ratio was 95, 3% for the first quarter with an underlying combined ratio of 92, 8%, which was seven four points higher than the prior year quarter.

This increase was driven by higher losses in both automobile homeowners, which I will discuss in further detail in a moment.

Partially offsetting this increase was a reduction in our underwriting expense ratio, which continues to reflect the benefit from higher earned premiums.

Net written premiums for the quarter were up 12% and included higher renewal premium changes in both automobile in homeowners.

In automobile in the first quarter combined ratio was 99, 3% an increase of 17 five points compared to our prior year quarter that reflected low loss activity due to the pandemic.

In the current year quarter automobile loss levels increased due to a combination of claim frequency returning to more normal levels and higher loss severity as vehicle and replacement and repair costs remained elevated.

During the first quarter, we increased rates in 23 states in response at an average rate of approximately 7%.

Great actions in additional states are scheduled to take effect in the coming months and quarters.

As we indicated last quarter, although it will take time for these rate actions to earn into our results. We remain confident we're on track to address the near term profit challenges.

In homeowners and other the first quarter combined ratio improved by eight points from the prior year quarter to 91, 2%, primarily driven by 17 points of lower catastrophes.

As Dan mentioned, the prior year quarter had elevated catastrophe losses from winter storms and freeze event.

Results for last year's fourth quarter also included higher net favorable prior year Reserve development.

The underlying combined ratio of 86, 9% was three points higher than the prior year quarter. As we continued to see higher severity related to a combination of labor and material price increases.

We will continue to seek increase pricing in response.

As a reminder for homeowners, we expect the upcoming second quarter to be the seasonally highest quarter for weather related loss levels.

Turning to production, we were very pleased to deliver another strong quarter in both automobile homeowners.

For domestic automobile retention was strong and as we expected down slightly to 84% as renewal premium change increased by about two points from the prior quarter to three 1%.

We expect renewal premium changes will continue to accelerate in each of the next three quarters and approached double digits by the end of the year.

And domestic homeowners and other retention was 84% and renewal premium change was 12, 3%.

The increase in RPC was primarily due to increased insured values in response to the inflationary environment.

Before I wrap up I'd like to take a minute to address the important issue of increasing motor vehicle fatalities.

More than 46000 people lost their lives on U S roads in 2021, the highest total in more than 30 years.

Grim reminder of the human cost of the increasing frequency and severity of auto accidents.

Most research points to higher speeds and increased distraction as the most prominent drivers of the ryzen fatalities.

Recent data published by Cambridge Mobile telematics, the partner that helps power or Intel or drive program showed that phone related distractions in February of this year increased to the highest level they have ever recorded.

Our own intelligent data aligns with this result.

Further the most recent addition of the travelers risk index continues to show evidence of higher levels of distracted driving among those surveyed.

In light of these observations and given April is distracted driving awareness month I wanted to highlight a couple of ways travelers is working to make a difference.

In partnership with the travelers Institute, we continue to support our every second matters initiative, which empowers drivers passengers cyclists and pedestrians to speak up set positive examples and play an active role in changing roadway behaviors to help prevent injuries and save lives.

Additionally, the inclusion of distraction is a rating variable in our intelligence offering showed some promise in terms of changing behavior.

We've seen a reduction in distracted driving events for drivers enrolled since introducing this variable.

Of course, we all play a role in keeping our roads. The safest possible. These are just a couple of examples of how we are raising awareness and trying to make a difference.

Before I turn the call back over to Abbie I'd like to welcome the trove team to travelers.

We were pleased to be able to acquire technology assets and hire a team of talented people from <unk> earlier this year.

We look forward to applying their expertise and capabilities to meet our customers, where they are give them what they need and serve them how they want with that I'll turn the call back over to Abbe.

Thanks, Michael.

Operator, we are ready to open up for Q&A.

To ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Yes.

And your first question comes from the line of Michael Phillips with Morgan Stanley .

Thank you good morning, everybody.

Alan I guess, just first high level question for you.

Just about the cycle, it's obviously a different cycle just in terms of its longevity.

For a number of reasons, but were pretty clearly at the tailwind of that and I think we're at the tail of that at a time when there is a pretty specific nuances that could possibly make somebody concern that loss trends accelerate faster than they otherwise would.

<unk> cycle things you mentioned in your opening comments demand surge voluntary policy demand demographic shifts inflation. The list goes on and on and it seems to be added to on a daily basis. I guess so the question, we get it and I know you've heard this question before as well those things that are kind of unique to the current situation make for pricing to kind of.

Pick back up again, if you will and it's not I guess for your book of business is different so maybe you could talk to.

Are you concerned about that are you surprised by that.

Any concerns at all that <unk> pricing has indeed continued to decelerate at a time when there is a lots of risk out there for a wall stress.

Yeah. Thanks for the question and let me, let me paint a picture for you. So the pricing environment. Despite what you're focused on which I suspect is the right number the pricing environment is actually quite strong.

You see that in <unk>, and DSI with overall pricing near record levels.

Earned and written continued debt earned and written continues to exceed trends in margins on a written basis are expanding.

When we look at the breadth of pricing gains very good the significant majority of our accounts continue to get positive rate.

And you look at Retentions at near all time highs that that tells you that the overall market is pretty stable.

And what we're what we're doing is deliberate Bryan.

You look at that retention and that tells you what we're doing is deliberate.

If we werent able to achieve what we wanted to achieve retention would be lower.

You got to add to that the pretty good progress we've made over actually at this point many years, a very very strong pricing gains. So so you have got improving margins.

And so that's sort of where we are right now so having said that as you point out there are some some clouds out there that we are very well aware of I think the industry is very well aware of them and.

And.

As we price the marginal product, we're looking at what the expiring.

Expiring rate is we're looking at at what loss trend is we're looking at what what other.

<unk>.

Other factors that impact margins and then we're putting a price on the product and so where we are.

We're not troubled by it.

Anything in this production environment that you see or for the outlook frankly.

Okay. Thank you Alan I appreciate that maybe a little bit more drill down question for my second one possibly for Michael on personal auto a lot of attention obviously on severity for physical damage side, but medical inflation has been kind of one of the best performers in the CPI index and yet theres concerns it might tick up.

It hasn't yet.

Yes, I think by liability is trending pretty high can you talk about that disconnect and what youre seeing in your liability book.

Sure Michael Great question and good morning.

I would say your assessment on medical inflation is.

I mean, it's ticked up slightly but from a low level, so something we pay attention to but not a particular concern.

It is interesting we havent spent a lot of time talking about bodily injury liability trying to NPI not because bodily injury liability trend isn't high but because it's not really high in excess of our expectation.

So we've got a realm.

Relatively.

I'll say a high view of what bodily injury severity is I think our views on it are consistent across commercial and personal lines, but again, we haven't been talking about it because it's not the item thats been the surprise right. The vehicles severity items have been the ones that had the unexpected.

Inflection point in the middle part of last year and remain elevated.

Okay does that mean that Michael that <unk> liability is.

What we're seeing for the industry, it's it's above 10%.

I wouldn't I wouldn't put a specific number on it maybe Michael but I would say we're in the we're in that neighborhood.

Okay. Thank you.

Yeah.

And your next question comes from the line of Ryan Tunis with Autonomous research.

Hey, Thanks, good morning.

Question on business insurance margins.

We improved year over year.

I realize the past couple of quarters, we've been benefiting from some favorable non cat weather.

I guess also some frequency related items in things like commercial auto can you just give us.

Paints a picture of sort of like to what extent did those come back this quarter and into the results that we saw.

Hey, Ryan it's Dan.

Yes, so not not not.

Not real big movements, there I think.

Greg gave you what's a pretty straightforward story to the quarter about a point better than the loss ratio really tied to <unk>.

Earned pricing being ahead of what we're seeing in the loss environment.

A point of improvement in the expense ratio to.

Your point there are there are other things that.

That will.

Impact.

The quarter's differently and there is some variability from quarter to quarter. This quarter. The net of those things when we compare to what we saw in the first quarter of a year ago was just about a wash.

Got it and then a follow up on the bond and specialty side.

Just trying to get a feel for how the re underwriting of that cyber book.

What type of tailwind that could be for underwriting margins can you just give us.

An idea of maybe what percentage of the management liability book has a cyber component.

Sure. Thanks for the question. This is Jeff click I think first and foremost.

Almost I remind you that we do have.

Significant reinsurance treaty on the book of business and so that's something that's important to remember.

We do feel really confident that the.

That the focus on the cyber security protocols is having an impact still early for US right. Because we started it effective in June but we're seeing it on the frequency and so more to come but we definitely feel good about about the results we're seeing so far.

Good question.

Brian It's Dan I'll, just add and I think you'll get intuitive the tail end of your question.

It's not a huge percentage of the premium base within within bonded specialty so its an important line of business that everybody is paying attention to it is not a huge component of the book.

Thanks, Dave.

Your next question comes from the line of Greg Peters with Raymond James.

Good morning, everyone.

I guess I would like to focus in on the expense ratio and I know you've spent.

Some time recently with investors talking about some initiatives Dan in your comments and I don't want to put words in your mouth, but it seemed like you were suggesting that the full year expense ratio might move to around 29, five and then.

A year out maybe 29.

And assuming that I remember that.

I also noted in Jeff's comments that or excuse me in Michael's comments.

The expense ratio benefited from higher earned premiums. So I guess I'm trying to bridge the gap between the expense ratio improvement that's coming from the higher than normal or typical premium volumes versus what the true underlying improvement in expenses if that makes sense.

Yes, Greg it's Dan.

I'm not sure that I would try to break it into its pieces, where we're managing to a total return.

And within that we are.

Trying to manage to what we are comfortable with from an expense ratio perspective. So we've made a lot of progress in improving the expense ratio from where we were five or six years ago.

We're pretty we said when it got down to the 30 level a couple of years ago, we were pretty comfortable somewhere around 30 coming.

Coming out of last year.

We signaled that we thought this year would be around 29, and a half and I was really trying to give you in my comments was that still sort of what we're planning for for this year I don't know exactly where it's going to come out, but that's the neighborhood of where we would expect it to come out a little better than that.

In the first quarter of the year, that's partially due to the fact that premium volumes were a little stronger than we would've expected at social partially due to the fact that theres some timing from quarter to quarter in terms of what's going to come through expenses, but.

But we are managing the strategic investments, we're making to move the business forward.

<unk> with expense discipline to make sure that we're continuing to improve productivity and efficiency also balanced with what our view is of where the topline is going so we're looking at all of those all three of those things together and saying we were in the 32 is a few years ago. We got down to 30. We told you. This year, we think that will go down to about 29% are happening.

The next step will be to go down to 29, but it's really balancing all those three things together.

Got it makes sense.

The second question I have would be just around the commentary on investment income.

And I guess.

With the upward movement in interest rates, just trying to understand just within the fixed income component of your portfolio, where the new money yields are relative to expiring.

And I know.

I know that you did raise your investment income guidance for the balance of the year. So just trying to.

Understand some of the moving pieces behind that.

Sure Greg It's a good question because this is the quarter in which we actually flipped from new money rates being below what's embedded in the portfolio.

As has been the case for the past several years.

By the time, we exit the quarter, where would you see that in the slides that the portfolio is now in an unrealized loss position as opposed to an unrealized gain position, but exiting the quarter. We think that new money yields are somewhere between 50, and 70 basis points higher than what's running off.

So as the portfolio slowly turns over and that is contributing to our increased view compared to the outlook that we had provided at year end in terms of what will happen to fixed income NII, increasing now as we get to the latter part of 2022.

Got it thank you for the answers.

Your next.

Question comes from the line of Elyse Greenspan with Wells Fargo.

Hi, Thanks. Good morning, My first question a couple of times you guys mentioned elevated severity in this inflationary environment.

So just curious within business insurance, you guys had been running at a 5% loss trend assumption.

Did you guys take that to this quarter.

So at least it's Dan.

I'll take that one.

And I'll say that.

We're thinking about especially in this environment was exposure near.

Near all time highs.

You got it you got to compare what we're doing on the total pricing side, including the piece of exposure that behaves like rate with what's happening in the overall loss environment. So as you heard in Greg's comments and in our comments, we have reflected a higher level of severity tied to inflation in our view.

So what we are booking for losses in business insurance.

<unk> largely tied to higher levels of inflation.

Higher levels of inflation also bring with it.

And with an offsetting benefit as you think about what we'll earn in on a go forward basis from higher exposures, so things like higher wages paid to the same workers. So we're going to get a higher exposure and a higher premium on the same risk as opposed to increases in exposure related to <unk>.

<unk> like more workers, where we're collecting more premium, but theres more risk because you've got additional workers.

So our view of the loss environment is higher.

Whether you put that in loss trend or whether you leave your loss trend.

Changed and book a medium term over the top severity on top of mechanically youre going to get to the same answer.

If you believe that the inflationary impact is going to be somewhat persistent at least over the medium term you'd put it in loss trends.

That's reflected in the numbers that Greg talked about in terms of a point of margin expansion in.

In the quarter and in the commentary that on a written basis with the production results. We saw this quarter, we expect margins to continue to expand going forward.

Okay. So you don't want to get that it impacts both sides of the equation I mean, it seems like it probably went up maybe to five and a half.

Maybe even 6% do you want to can you provide the magnitude of the increase or would you rather just talk to the components of the positive and the negative aspects of exposure.

Your line loss trend.

I think directionally, that's the way to think about it at least but keep in mind. As you said there is both sides of the equation and we're going to and are seeing the benefit on the exposure piece as well.

Okay and then.

Alan.

Greg both of you guys also talked about it about strong retention just showing the stability of the market and you guys saw pretty good growth in all of your businesses, but sticking with BPI. If we're talking about elevated loss trend pricing getting close to that loss trend can.

Can you just help us think through why why now seems like.

A good time to kind of show.

Higher premium growth.

Yes, Alicia as a reminder, we've had this conversation over the years, we don't go out and hold up a sign that says grow or shrink we execute one account at a time and when there is an account out there on the pricing terms, we want to put in the portfolio we do.

And this quarter, Greg and his team did a fantastic job and.

A result of that again the accounts, we want pricing terms that we want resulted in that growth. So its not theres no sort of overall coaching message other than go out and execute the next account Greg you want to I think that's exactly right I think through this cycle. We've been had the benefit of having a high quality book of business that we have.

It really had to remediate broadly from an underwriting point of view. It has been just funding for some of these barrels that we've talked about so we were very pleased with when we add up all the numbers and see the execution at a very granular level from our most profitable accounts, so our least profitable what that retention slope looks like and we're very comfortable with that.

Keep in mind at least we're talking about very strong margins at the time and saying even at this level we continue to.

To expect that we're expanding margins I mean these are some of the best underlying combined ratio of that business insurance has seen in the last 14 or 15 years. So to have retention at all time highs when margins are as strong as they are it feels great.

Okay. Thanks for the color.

Again.

Your next question comes from the line of yarn, Ken <unk> with Jefferies.

Thank you good morning, a couple of questions on Roe.

So I think you had a 13% operating ROE last year.

Three times investment leverage.

So if you got another point of interest rate increases coming in through the portfolio you've got another two points of ROE.

So essentially if the ROE target I think for the cycle.

With higher interest rates, so with that in mind would you.

We expect to take the foot off of rate and terms and conditions at all to achieve greater growth or.

Do you think there's more to do on the underwriting side.

Okay.

Hi.

Well first of all I think it's hard to talk with such a broad brush we've got.

I assume you're directing your comments.

It's a $16 billion book of business with lots of different products. So it's hard to paint with a broad brush.

We will.

As you heard this quarter written margins continue to.

Expand that will earn in and we continue to execute from here to continue to improve margins.

If we're going to try to be mid teens over the cycle that means at some point ideally you'd get you get above it.

Having said that we got we got a 10 year treasury that.

On the move but its still not near historical.

Norm, even at two eight or two nine.

And by historical standards relatively low so that does impact our hurdle rate and what we're trying to achieve.

And then the last thing I'd say is from here.

The price change is going to increase in some lines and sub businesses is going to go sideways in some and it's going to go down. Another so it's that's just a function of granular execution.

Okay. That's helpful. And then my second question around returns.

So I think the stock is currently at one <unk> book ex Aoc.

Hi.

Which I think would suggest that you need a roughly 60% Roe to breakeven on buybacks here.

So with that maybe you can talk a little bit about your preferred Avenue of capital deployment. At this time is it to really achieve more growth as margins are expanding or do you expect to do more buybacks.

Let me start Dan so so.

We think about it.

And I think that's important to go through the whole the whole chain here, we generate more capital than we need to.

We can.

Certainly deploy back into our business and so when we have more capital than we need we're going to give it back.

And that is sort of a philosophical principle that we've operated under for a pretty long time.

So we've got we've got a couple of options and how we're going to give it back and we know we've got.

Certain segment of our shareholder population, that's looking for a dividend a dividend yield and we're going to make sure that we're paying for me it's competitive.

And then beyond that we're going to buy our stock back.

And we're not we're not investing in our stock we're not trying to time to market, we're trying to rightsize capital.

We bought back plenty of stock it.

At these levels over the years.

Started our stock buyback program in 2006 I think.

And the average price per share of which we bought back the stock is about 70 Bucks. So I really think you got to think about it in that broader context, it's Ben.

It's been an exercise in and capital management for us, but it's been a fantastic investment over the years and I think when you look back at this moment in time years from now Youre going to say the same thing.

Yes.

Those exact same thoughts.

Okay I appreciate the color. Thank you.

Your next question comes from the line of Tracy <unk> with Barclays.

Okay.

Good morning, just one question for me a follow up to Dan comments about all the assets to maturity is reminding us on a statutory perspective.

Net unrealized losses on investments doesn't really matter for regulatory capital purposes, I just wanted to ask a material.

Trio on your internal economic capital model, and how you think about capital allocation.

Yes pretty much Tracy.

Which is one of the reasons why when we talk about book value per share, we almost always talked about adjusted book value per share.

The unrealized gain or loss position in the portfolio, we think of as.

We have duration in the portfolio interest rates are going to move youre going to have an unrealized gain or loss, it's not really driving the economics of how we think about the capital position of the company.

Great. Thanks, that's all for me.

Yes.

Our next question comes from the line of Mayor Shields with K B W.

Thanks, I was hoping to start with a question for Michael.

I understand that we're ramping up rate increases that are going to earn in.

Going forward for personal auto, but I guess I was surprised with the level of new business growth and retention.

And.

I'm wondering whether the strategy now is to write a fair amount of business.

Competitor dialed down advertising and count on overall market rates rising and therefore, the ability to retain some of that business. In other words are you writing business below target margins right now in auto with the expectation affiliate picked over time.

Yes. Thanks Meredith This is Michael I would say the strategy is to get the rate we need to improve the profitability.

And the growth that Youre seeing is a byproduct of how our rates showed up in the market.

Relative to that of our competitors and actually when you look at underneath it.

State by state basis, you actually see quote volumes moving around based on industry rate level think more more industry rate being taken in the state drives quotes into the market.

You will also see our close rate varying in one state versus another based on the rate level that we've taken and how that compares to our competitors. So.

It's really less about.

Looking for growth on a tactical basis, it's really all about looking at the right indications look recognizing that we need to make progress on pricing and filing.

The indications and the rate requests with the states and getting them in.

Quickly as we can and the growth Youre seeing is a byproduct I would say to your point.

Retention dipped a bit from 85% to 84 again relatively consistent with what we would have anticipated given the change in RPC.

And while new business production.

The dollars were up 4%, which is the same number they were up in the prior quarter and the fourth quarter of 2021 more of that 4% is now represented by price change than was in the prior so theres some slight deceleration.

Kind of in the underlying growth and we anticipate as we continue to push for rate will probably see some more of that.

Okay, no that makes sense.

Bigger picture question, so maybe for Alan.

Unlike last quarter, there was no mention at least than I could.

The pandemic have any impact on the underlying loss ratio is that.

Correct me in other words that that particular component that seem to be relevant anymore.

I would say Meyer and I'm looking at that very small.

And it also gets mayor.

More and more difficult. So so in terms of did we have any sort of directly COVID-19 related charges.

Become a there was never a big story for us in the first place and that's certainly not a big story now then in terms of.

The underlying loss environment other things that were indirectly impacted by Covid. It just gets harder and harder to parse out.

What is a change in Covid and what is just the new normal in terms of whether its people working from home or.

Or things like that so.

I think your reading is right there is not a big story in the quarter related to Covid.

Okay perfect. Thanks, so much.

Thank you.

Your next question comes from the line of Josh Shanker with Bank of America.

Yes. Thank you a couple of questions.

Can we speak to fourth quarter and the first quarter. There obviously was a big change in the loss ratio underlying where there are specific items.

Read through the Q as quickly if I could it didn't seem like youre, calling out anything unusual there and making the sequential comparisons is there anything that you want point out between the two quarters.

Okay.

Just thinking about.

Josh are you talking about on a consolidated basis or one of the segments Im sorry business insurance of course, the business insurance.

So.

I think there is seasonality in different parts of the segments Brexit callout in his fourth quarter comments weather.

<unk>.

Property losses, not related to cat were a little better than our expectations.

And I think we've had this conversation just before we really don't think about think about that sort of sequential quarter to quarter reconciliation. There are different things that occur in different quarters. So I think the most apples to apples comparison in our view is is Q1 versus Q1 and Thats the way we do it.

That's fine and then on <unk>.

Workers compensation, obviously, a big part of the favorable development in business insurance in the quarter can we talk about what youre seeing in the segments or should I should say the lines of business other than workers' comp on prior year development and whatnot.

Sure so in NPI for the quarter.

So again the pieces I gave you.

$113 million in total for the quarter.

For.

The largest piece being comp that was 80% to 85 I gave you. The we had $45 million of a charge for environmental related to the older years.

So that leaves you with the other things so it's a general liability lines.

A fair amount of favorability spread across many accident years proper.

Property, a modest amount of favorability spread across many accident years CMP net favorability from a number of accident years.

The international business showed some favorable development in <unk> as well none of those things were sort of individually significant which is why I didn't call out in my comments, but we saw a favorable development in those lines as well.

And so it's fair to say universally favorable across all lines.

The takeaway I would come with.

The one line I Didnt mentioned was auto and not because it was a huge outlier, but I don't think that the net result of <unk>.

<unk> was much more than a wash within business insurance.

But still very good result, thank you very much.

Your next question comes from the line of Alex Scott with Goldman Sachs.

Hey, good morning.

First one I had was just a follow up on cyber.

I was just interested if you could provide any commentary on that kind of works.

And I know this is a real big business for you, but I'd just be interested in that.

And any any claims expense.

Excuse me any claims experience you've seen so far from the.

Russia, Ukraine conflict if at all.

Thanks, Alex this is Jeff click.

Relative to the second part of your question no no active experience relative to the current situation.

And there has been.

Obviously, a little more dialogue on this topic recently.

Relative to our offering we are comfortable with.

Cyber offerings exclusionary language.

No immediate plans to change it.

As always we'll continue to monitor our policy language in the context of evolving risks.

But thanks for the question.

Yeah.

Got it thank you and maybe just one more follow up on frequency I think Josh and Ryan both asked about this a little bit but any way you can quantify at all for us.

Any frequency benefits that still remain for workers' comp and GL specifically.

Hi.

Yeah, just just thinking through I guess this is sort of a wash when you look at the items year over year comparison wise, but when we think about it relative to pre pandemic and I. Appreciate it may or may not actually revert to those levels, but I'm just trying to gauge if there's still.

A benefit there we should be considering.

Yes.

To the degree that there is any Alex I think it's pretty small.

The other thing.

That we've used to describe.

Reserving in the and the uncertainty of the sort of Covid environment and port closure environment is that we've tried to remain cautious and so I think we have tried to remain cautious so even though some of the data might still be indicating some modest benefits from.

From frequency, where we're making sure that.

For booking losses to allow for what might come through either later or on the severity side, so not really a big benefit coming through the quarter.

Alex I would just add on the workers comp comment obviously as the economy starts opening up again, we would start to see some of the frequency normalization, which we have seen in the workers' comp line, but certainly at expectations nothing above that rate like what we're expected.

Understood. Okay. Thank you.

Your next question comes from the line of David Mode, Madden with Evercore ISI.

Hi, Thanks for squeezing me in I just had a question.

<unk> on business insurance and the commentary around written rate being above.

Loss trend and really just trying to drill down and thinking about just how much exposure is acting like right and so if I just compare the $4 four renewal rate change.

In business insurance with the loss trend.

Call it 5% to 6%.

It implies that to expand margin you would need around a point to a point and a half.

B exposure change that's acting as rate.

I'm just wondering is this the right way to think about it roughly just like a point of the five points of.

Exposure change acting as rate.

David It's Dan I think mathematically if you just took a point in that equation that would get you to somewhere around breakeven and.

Tony that we think on a written basis margins are still expanding.

It is difficult and I appreciate what everybody is trying to do it it's difficult to have a rule of thumb for how much exposure behaves like rate because as I.

<unk> said in the answer to an earlier question that things that are driving exposure can vary from period to period, whether it's inflation driven or units of risk driven the lines of business mix changes from quarter to quarter in that and that impacts it but I think.

The short answer I would I would say is when we're looking at the level of exposure that we wrote in the first quarter.

More than a point of that we think of is behaving like great, but I really wouldnt try to put a much finer point on it than that.

The thing I'll just add David is is loss trend for this purpose is really a very blunt instrument and.

That's sort of.

One number aggregating loss trend across that we look at it at a very granular level. So.

We just don't approach it is sort of macro.

Blunt instrument level that you did which is I think why we're also looking at each other wondering how to respond to that.

And I get you're just trying to get some measure of cost of goods sold.

Blunt instrument and it is hard to do.

And the.

The other thing I will say as is.

Loss trends frequency of changes in long term view of frequency and severity.

That's just the mechanics for booking losses, and there are other mechanics for booking losses.

So it's just it's rarely the only thing impacting.

<unk>.

So I just caution you against.

Looking at something that seems very simple and thinking that's the answer.

Okay, great. Thanks, I appreciate that thank.

Thank you.

We currently have time for one final question.

Our final question comes from the line of Brian a matter at Meredith with UBS.

Yes, thanks for taking my question.

Alan I wanted to ask a little bit about business insurance, a little more broadly speaking here as we look at GDP in the U S.

As you guys look back how closely correlated is exposure growth and RPC relative to GDP in the U S is there a lag effect and then maybe take that also on loss trend and what impact do you typically see economic growth or deceleration having on loss trend.

So is it really so really good point a really good question, we do see exposure growth, having a reasonably high not one to one but a reasonably high degree of correlation with GDP.

So I do think you're onto something Eric again, it's within a range and there is some lag to it but.

And that's also.

And over time measure I don't I don't think you can look at GDP today. This week. This month this quarter and say that's what exposure is going to be you do need to look at it.

Over time, it's generally get there.

When you talk about the impact of economic activity on losses. That's also going to vary by line and it's hard to paint with a broad brush I do think probably.

<unk>.

Making an observation at a macro level there is a correlation between an economy heating up in loss trend going up I think there are several lines. It would contribute to that but you do need to remember again to the first point is that as an economy heats up.

Do get exposure growth.

To one degree or another offset that higher level of of loss trend.

Makes sense and then my second question just quickly here.

You've talked a lot about on the severity side on by an inflation I'm. Just curious what are you seeing as the court system opens up in the U S are you seeing kind of return to the old <unk>.

Social inflation environment, we were seeing back in 2018 19.

I will tell you we absolutely expect that I don't think the court system is opening up yet I mean, it's opening up an unwinding very slowly and I think it is going to play out over over a while.

You would think by now that it would be open and running at pre pandemic levels and it's just not.

But our full expectation Bryan is consistent with your comment we would we would expect to see that pre pandemic environment in terms of.

Social inflation.

It makes sense. Thank you.

Thank you.

Yes.

MS Goldstein I will turn the call back over to you now for closing remarks.

Thank you very much for joining us I appreciate your time and as always if there's any follow up please feel free to reach out to Investor relations have a good day. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

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